Sep 12, 2016
From KPMG TaxWatch
The Indiana Department of Revenue has a long history of rejecting transfer pricing studies when attempting use its discretionary authority to adjust a taxpayer’s income or force a taxpayer to file a combined return with affiliates. A recent Letter of Findings indicates that the Department may be revising their position in light of two recent tax court decisions. Notably, in the Rent-a-Center East case, the tax court rejected the Department’s argument that a taxpayer’s transfer pricing study was irrelevant because it concerned financial accounting, not tax, was prepared for federal tax purposes, and was not binding on state authorities. Rather, the court determined that the study was relevant because it was not prepared solely to address federal tax evasion, but was prepared to “clearly reflect the income of related organizations.” Likewise, in Columbia Sportswear, the court held that a transfer pricing study was not rendered irrelevant simply because it contained standard disclaimer language stating it was for federal purposes only and did not “reach any conclusions on state tax issues.”
In the recent Letter of Findings, the Department first observed that the authority to adjust a taxpayer’s income or require alternative apportionment is “ambiguous” and such ambiguities must be resolved against the Department. Given this low standard and in light of the recent tax court cases, the auditor in the given dispute did not establish with sufficient specificity that a taxpayer’s transfer pricing study was flawed. The audit report did note that certain of the comparables selected were companies that appeared to be selling different types of goods than the taxpayer and that if the sales were made to unrelated entities, the taxpayer would not be able to base their sales price on the unrelated entities' gross profit margin. Thus, it was reasonable for the auditor to conclude that the allocation of income in the study appeared to be weighted to minimize the taxpayer’s Indiana tax liability. However, the auditor did not establish the “reasonableness” of its decision to reallocate the parties’ gross operating margin. Please contact Marc Caito at 317-951- 2434 with questions on this Letter of Findings 02-20150171.
For more information about TWIST or to view archived episodes, please visit our TWIST homepage.
To receive TWIST e-mails each Monday morning, make sure that state, local and indirect is checked off as one of your topics of interest on the KPMG TaxWatch registration site.
The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.